The connections between state fiscal capacity and spending on social welfare have undergone vast changes in recent years. Between 1977 and 2000, major shifts occurred in how much was spent on social welfare programs, how states allocated funding across different social welfare functions, and how state fiscal capacity was related to these developments. To compare changes in spending patterns for rich and poor states over time, we classified all of the states plus the District of Columbia into four quartiles with respect to their fiscal capacity, as measured by real per capita income averaged over the 24-year period. Exhibit III-1 shows a map indicating the states in each of the quartiles, from the richest states in Quartile 1 (shown as the lightest colors) to the poorest in Quartile 4 (shown as the darkest colors). States with the lowest per capita income are generally found in the South and the West, while the wealthier states are located in the Northeast, around the Great Lakes, and on the Pacific Coast.

Exhibit III-1.
States by Fiscal Capacity Quartile

Selected Characteristics

Quartile 1

Quartile 2

Quartile 3

Quartile 4

Mean per capita personal income, 1977-2000 (2000 dollars)

$24,794

$21,387

$19,242

$17,058

Mean percentage of people under federal poverty level, 1977-2000

11.0

11.0

13.2

17.1

Mean percentage of population unemployed, 1977-2000

3.1

3.0

2.7

3.2

Median population density (persons per square mile), 1977-2000

338

89

57

52

Exhibit III-1 also displays information about states in these different quartiles, including average real per capita income, poverty rates, unemployment (per capita), and population density-all characteristics included in the econometric models as independent variables. As well as differing in income levels, these poor states also had higher poverty rates and lower population densities (they were generally more rural) though, surprisingly, they did not have much higher per capita unemployment rates.16

This classification is simplistic. If one calculated fiscal capacity quartiles every year, some states would shift from one to the other over time. However, these simple four-level rankings showed unexpected stability. Most of the states would not shift quartiles even if allowed, and where changes did occur, the changes were nearly always to an adjacent quartile, not a jump of two or three.

When averaged over the entire period from 1977 to 2000, per capita spending on social welfare was positively correlated with state fiscal capacity, as shown in the chart at the top of Exhibit III-2.17 A similar pattern exists for spending per poor person, shown at the bottom of Exhibit III-2. When public hospital payments were included, the wealthiest 13 states (Quartile 1) spent an average of $825 per capita (in 2000 dollars) over this time period, while the poorest 12 states (Quartile 4) spent $630 per capita. When payments to public hospitals were excluded, mean per capita spending by states in the wealthiest quartile was $639, while average spending by states in the poorest quartile was $407.

Exhibit III-2.
Spending Per Capita and Per Poor Person on Social Welfare, With and Without Hospital Payments, Averages by Fiscal Capacity Quartiles, 1977-2000

Average spending per capita

This difference in spending between rich and poor states resulted largely from differences in states' spending of their own tax revenues, as shown in the chart at the top of Exhibit III-3. Federal grants exerted a complex effect on inequalities in state spending. In dollar terms, federal funding actually increased state differences with respect to fiscal capacity because the Quartile 1 received higher grants per capita than the other quartiles. The richest quartile of states, for example, spent an average $371 per capita from federal sources, while the poorest quartile spent $339 (when public hospital payments are included). However, because poor states spent less money overall on social welfare, that $339 constituted a large proportion (83 percent) of their total spending on such programs. By contrast, the $371 per capita from federal sources spent by the richest quartile of states made up a much smaller share (58 percent) of their total social welfare budgets. That is, more federal money went to rich states than to poor states, but poor states relied more heavily on the federal government to support their social programs.

The chart at the bottom of Exhibit III-3 also shows that state fiscal capacity bore a similar relationship to state spending on non-social welfare functions. Again, the differences were due to how much of their own revenues states spent. However, federal spending played a smaller role in this component of state budgets. Although federal spending averaged over two-thirds (69%) of all spending on social welfare functions, federal grants typically made up only about one-eighth (13%) of total state spending on non-social welfare functions.

When we disaggregated social welfare spending into more specific categories, the relationships between state fiscal capacity and state spending became more complex. As the chart at the top of Exhibit III-4 demonstrates, the poorest states (Quartile 4) showed much lower levels of spending on cash assistance and non-health social services than did wealthier states.18 Levels of spending on Medicaid were also highest for the rich states in Quartile 1; spending levels were lower, albeit similar, across Quartiles 2 through 4. By contrast, the poorest states spent the most per capita on public hospitals. State fiscal capacity was, in sum, strongly related to spending on cash assistance, moderately correlated with spending on non-health social services, and least correlated (even negative for hospital payments) with spending on health or medical assistance.

Exhibit III-4.
Spending Per Capita and Per Poor Person on Different Types of Social Welfare Functions, Averages for Fiscal Capacity Quartiles, 1977-2000

Average spending per capita

Average spending per poor person

Because social programs were intended mostly to help low-income people, per capita spending levels might fail to capture differences in the degree to which states met social needs. To understand spending from this perspective, we compared spending levels per poor person in each state. Using this measure, differences among rich and poor states were greater and more consistent, as shown in the chart at the bottom of Exhibit III-4. Disparities between the top and bottom quartiles were even larger for spending on cash assistance and other non-health social services; and Medicaid expenditures and public hospital payments showed stronger and positive relationships to fiscal capacity.

Averages over time cannot show changes in the relationships between state fiscal capacity and spending on social welfare programs. Yet those relationships changed enormously between 1977 and 2000. To see these developments, we traced changes in average spending levels in each of these quartiles and for each category of social welfare spending.

Exhibit III-5 compares trends in spending for cash assistance, Medicaid, and non-health social services, with spending levels adjusted for inflation using the GDP price deflator. Per capita spending on cash assistance was lowest in the poorest quartile of states throughout the 24-year period, as shown in the graph at the top of Exhibit III-5. However, states with different fiscal capacities began to converge in their spending on cash assistance in the mid-1990s. This convergence came about as cash assistance spending in richer states (i.e., states in Quartiles 1, 2, and 3) declined, while states in Quartile 4 saw virtually no change in their already low spending levels. State fiscal capacity thus became less correlated with spending on cash assistance programs at the end of the 1990s when compared to the early 1990s and especially the late 1970s.

The 1990s also produced major changes in state spending on Medicaid, as depicted in the graph in the middle of Exhibit III-5. At the beginning of the decade, Medicaid payments grew rapidly for states in all quartiles, though the greatest growth occurred among poor states. By 2000, per capita spending in Quartile 4 was about 10 percent higher than per capita spending in Quartiles 2 and 3. The relationship between state fiscal capacity and spending on Medicaid thus declined in strength. Like the trends for cash assistance, spending levels of rich and poor states converged. But unlike cash assistance, spending on medical assistance programs saw an upward convergence as previous low spenders joined high spenders, not a downward convergence as high spending states came down to the level of low spending states.

Per capita spending on non-health social services showed no such convergence, as illustrated in the graph at the bottom of Exhibit III-5. Instead, it revealed growing differences between states of different fiscal capacities. The poorest states showed the lowest per capita spending throughout, since 1980. Yet the real separation occurred in the 1990s. Although spending on other social welfare grew in all states during the 1990s, the wealthier states in the top three quartiles showed rapid growth in such spending from 1997 through 2000 at the same time states in the poorest quartile increased their spending much more slowly. Non-health social services include expenditures for child welfare, child care, energy assistance, and many other social services, as well as the costs to public agencies of administering such programs, cash assistance, and Medicaid.

The strong growth in Medicaid spending might result in part from higher levels of inflation for health services. To gauge the importance of health-specific inflation rates, Exhibit III-6 shows trends in spending for medical assistance using the CPI for health care. With this inflationary adjustment, average per capita spending on Medicaid still rose, though less strongly, as illustrated in the graph at the top of Exhibit III-6. Spending on public hospitals actually declined over this period for the three wealthier quartiles, as depicted in the graph at the bottom of Exhibit III-6. However, the poorest quartile showed a slight increase in per capita expenditures. Thus, as was the case for Medicaid, the poorest states increased their spending on health-related functions more than wealthier states did in the 1990s.

Exhibit III-5.
Changes in Average Per Capita Spending on Different Social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Cash Assistance Adjusted with GDP Price Deflator over Time by Income Quartile

Average Per Capita Spending on Cash Assistance Adjusted with GDP Price Deflator over Time by Income Quartile

Average Per Capita Spending on Non-health Social Services Adjusted with GDP Price Deflator over Time by Income Quartile

Exhibit III-6.
Changes in Average Per Capita Spending on Health-Related Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Public Hospitals Adjusted with CPI Medical Index over Time by Income Quartile

Average Per Capita Spending on Public Hospitals Adjusted with CPI Medical Index over Time by Income Quartile

These increasingly complex relationships between state fiscal capacity and various forms of social welfare spending were not found in trends and patterns for non-social welfare spending, as indicated in Exhibit III-7. Throughout the 24-year period, spending per capita outside the social welfare area was greatest in the richest states and lowest in the poorest states, and growth in spending after adjusting for inflation showed none of the dramatic short-run changes found in cash assistance and Medicaid.

Exhibit III-7.
Changes in Average Per Capita Spending on Non-social Welfare Functions, by State Fiscal Capacity, 1977-2000

Average Per Capita Spending on Non Social Welfare Adjusted with GDP Price Deflator Over Time by Income Quartile

Finally, states have changed how they spend their social welfare dollars as well as the way they fund those functions. Exhibit III-8 indicates the percentage of social welfare spending supported from state and local governments' own-source revenues rather than federal grants. Over the entire period, states in all quartiles showed a long-run decline in their reliance on own-source revenues. But the declines were greatest among the wealthier states, which, at any point, relied less on federal grants and more on their own-source revenues than did poor states. Thus, some convergence occurred, especially in the 1990s, as poor states in Quartile 4 slightly increased their proportionate use of own-source revenues, while the richer states decreased their reliance on such sources and increased their dependence on federal dollars.

Exhibit III-8.
Percentage of Total Social Welfare Spending From State and Local Sources, by Fiscal Capacity Quartile (public hospital spending not included)

Percent of Spending From State/Local Sources over Total Social Welfare Spending By Income Quartile

These many changes combined to produce major realignments in a relatively brief period in the spending profiles of rich and poor states. Exhibit III-9 shows evidence of these shifts by tracking the percentage of total public welfare spending in different program functions in the wealthiest and the poorest quartiles (Quartiles 1 and 4). Medicaid absorbed a much larger share of the budgets of both rich and poor states. Cash assistance spending fell in all states, though most precipitously in rich states, thereby reducing differences between rich and poor states between 1980 and 2000.

Non-health social services declined slightly as a component of overall social welfare spending in all states. But the biggest change with respect to this category of mostly non-health social services was the growing disparity between rich and poor states. Although poor states spent slightly more on such services as a percentage of their total social welfare budgets in 1990, by 2000, they had spent a much smaller percentage of their budget on these non-health social services. In just 2 decades, the components of state social welfare budgets changed in fundamental ways. They moved away from cash assistance and toward health services, and poor and rich states became increasingly different in the role of non-health social services in their total social service budgets.

These findings reinforce the need to estimate different econometric models for different types of social welfare spending, because each type shows distinct dynamics. They also pose a challenge: the relationship between state fiscal capacity and spending on different public goods seems to be mutable, suggesting a need to dig deeper after the econometric analysis and determine what dynamics are accounted for by the models and what changes are not. Finally, the trends show that poor states in particular have seen a radical transformation in the package of social welfare functions they support, a development that argues for special attention to their social welfare budgets and the factors affecting them.

Exhibit III-9.
Changes in Percentage of Total Social Welfare Spending for Three Major Functions, Comparing Rich and Poor States, 1980, 1990, and 2000

Rich states (Q1) are those in the 1st or highest quartile on fiscal capacity; poor states (Q4) are those in the 4th or lowest quartile

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